Can You File Bankruptcy With a 401k?

Find out whether your retirement accounts will be protected in bankruptcy, including your 401k.

If you find yourself in need of bankruptcy relief, you can also rest assured that the funds in your 401(k) account are safe, but read on to learn whether bankruptcy law protects other retirement accounts, too.

(Not sure which bankruptcy chapter is right for you? Read Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy.)

How Bankruptcy Protects Your Future

An underlying principle of bankruptcy is to give filers a “fresh start,” or an opportunity to climb out of a black hole of overwhelming debt and start anew. Taking away your retirement funds would not be furthering your fresh start because you might find yourself in the same position once you reached retirement age. Consequently, the law protects many retirement accounts from the reach of creditors when you file a bankruptcy case.

Protected Retirement Accounts

Bankruptcy law protects the entire balance of some types of retirement accounts in full. Some, however, are safe only up to a certain limit, while others don’t receive any protection at all.

ERISA-qualified accounts are protected in their entirety:

  • 401(k), 403(b), and 457(b) plans
  • tax-exempt organizations and government plans
  • profit-sharing plans
  • KEOGHs
  • most company pensions, and
  • Social Security funds.

The following accounts receive protection up to a maximum a combined total of $1,283,025 (this amount will likely adjust in 2019).

  • IRA’s
  • Roth IRA’s
  • SEP-IRA’s (for small business owners), and
  • SIMPLE IRA’s (for self-employed individuals).

If you aren’t sure about the status of your retirement funds, contact your plan administrator or a qualified bankruptcy attorney. You’ll find the legal definitions of these accounts in the Internal Revenue Code.

Other Retirement Accounts

A retirement annuity might qualify for a federal exemption if it is designed to pay “on account of illness, disability, death, age, or length of service.” (Bankruptcy Code § 522(d)(10)(E)). It might also qualify for a state exemption, depending on the state where you reside.

For other accounts, protection exists if you can exempt the particular property from the reach of your creditors. An exemption is a law that explains what type of property you can protect in bankruptcy. You will find most exemptions in state law, but some federal exemptions apply the same to everyone in the country.

Cash and investment accounts, such as the following, are difficult to exempt:

  • insurance cash value
  • traditional savings accounts
  • money market or investment accounts
  • stocks and bonds, and
  • mutual funds.

These types of retirement funds will likely be exempt only if your state allows an exemption for cash (few do) or you take advantage of a “wildcard” exemption (an exemption that will enable you to protect any property of your choosing). The federal bankruptcy exemptions and some state exemption schemes have wildcard exemptions.

If you have these types of assets (or anything of value), you’ll want to be sure to speak with a knowledgeable bankruptcy attorney.

When Retirement Funds Lose Protection

The money in an exempt retirement account remains protected as long as it stays put. Once you withdraw it or receive it as a distribution, the funds will likely lose its exempt status unless you quickly roll it over to another protected account.

For instance, money withdrawn from your IRA and placed in your checking account won’t be exempt under federal law. It might be exempt under state law, but you’ll need to check the status with a local attorney. This rule isn’t limited to funds withdrawn before the bankruptcy case. Courts have held that retirement funds withdrawn months after the bankruptcy filing can lose protection, too.

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